The most obvious example of the agencies’ power, and by
‘agencies’ we are only referring to Standard & Poor’s and Moody’s (given
their dominance), was witnessed with the recent downgrading of China’s
Sovereign debt. On the 22nd of May this year, it was noted in the
financial press that China
had promised to allow U.S. credit rating agencies into its domestic market
to help draw on foreign investment, with the underlying aim being to provide
confidence where Chinese rating agencies could not. Two days later, Moody’s cut
China’s sovereign debt rating from Aa3 to A1 for the first time since 1989, stating
in the process that ‘China’s
financial strength will erode somewhat over the coming years’ which led,
not unexpectedly, to Chinese officials accusing Moody’s of exaggerating China’s
economic difficulties and underestimating financial reforms. Whilst
columnists will see this move as an indicator to other
issues, the issue for us is the extraordinary power that the agencies hold
over entire societies; though China is unlikely to collapse because of this
downgrade, the effects are more than statistical – the downgrade initiates a
chain reaction of bad press, rating-based reforms which may not necessarily be
what a given country needs, and ultimately the accumulation of negativity that
can quite easily cause a spiral. With China’s economic position on the global
scene, any spiral could have dramatic effects for almost all corners of the
globe. However, the agencies do not just reprimand, they also suppress, and two
countries in particular are feeling that pressure at the time of writing.

Although, essentially, it is the same story but of differing
degrees, we shall start with the current situation in Portugal. The Portuguese
have endeavoured to develop an anti-austerity pathway to recovery which, confirmed
by the E.U. at the end of May, has now seen the country move out of the
E.U.’s ‘corrective’ element of its ‘stability and growth pact rules’. Yet, this
positive news for the Portuguese people did not make an impact upon their
nation’s credit rating, which forced the President, Marcelo Rebelo de Sousa,
and Prime Minister, to condemn
the actions of the agencies, suggesting that they were preventing Portugal
from recovering without merit – Portugal’s credit rating remains at ‘junk’.
However, Portugal is not the only country being restrained by the agencies,
with India currently embattled against the agencies – India was unsuccessful in
its attempts to have
its rating upgraded in 2016, and have been questioning the agencies’
methodologies ever since. With a leading Indian minister declaring that the
agencies’ assessment was ‘one
of the most egregious examples of compromised analysis’, the tone has been
set for relations between the country and the leading agencies, which brings
all of the BRICS nations into direct conflict with the agencies as this author
has discussed
elsewhere. There seems to be a stalemate at play that fundamentally
confirms Freidman’s observation.

Ultimately, the agencies responded to attempts via the
Dodd-Frank Act of 2010 to intervene in their methodologies extremely
negatively, and have fought the intervention ever since. Subsequent regulatory
endeavours have wilted under such a staunchly-defended approach and rather
quickly the rhetoric surrounding rating agency methodology has turned to the
need to increase transparency,
rather than intervening and enforcing x, y, or z. The issue with this is
two-fold. Firstly, the top rating agencies have proven, without question, that
they cannot be trusted to perform within the confines of the law – multiple
indictments since the Crisis confirm this; the agencies were not just ‘caught
up’ in the hubris of the era. Secondly, the protection attached to the
agencies’ processes and constitutionally protected ‘freedoms’ (this is a notion
that is being contested back
and forth post-Crisis) is, in reality, the residue of the framework that
surrounded the very earliest commercialised agencies in the 1840s – no longer
is it necessary that the products of the agencies, and the processes that
underlay them, are protected at all costs. The mercantile environment of the 19th
Century has given way to the actuality of the agencies no longer being
important to a bourgeoning trade but, now, society.
It is important, in fact it is vital, that the methodologies of the agencies
are controlled more than they currently are, because the actions of agencies
that once informed distant mercantile creditors on the creditworthiness of
borrowers are now systematically affecting societal development on an almost
daily basis, and their influence continues to grow despite continually
transgressing – where that equation takes us all is a frightening
contemplation.

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